Making Tax Digital explained – what HMRC is trying to achieve (and why it matters)

What is Making Tax Digital?

At its core, Making Tax Digital (often shortened to MTD) is HMRC's plan to move the tax system away from paper records and manual processes, towards a fully digital system.

Under the new rules, businesses and individuals with qualifying income will need to:

• Create digital records of income and expenses, ensuring each transaction's value, date, and HMRC category of allowable expenses are recorded to meet MTD obligations
• Use MTD compatible software that is HMRC-recognised and fit for purpose or tax digital software that is commercially available and HMRC-approved
• Submit quarterly digital updates to HMRC using MTD compliant software, replacing the traditional annual tax return or self assessment tax return for those above the MTD threshold
• Complete a period statement and a final declaration at the end of the tax year

Quarterly digital updates are now a core requirement, meaning that instead of submitting an annual tax return or self assessment tax return, those above the relevant threshold must report income and expenses every quarter and make a final declaration at year end.

Making Tax Digital for Income Tax is a new approach designed to help customers avoid errors and make submitting tax returns easier. From 6 April 2026, MTD for Income Tax will apply to anyone with qualifying income above £50,000 per year from self-employment or property. Qualifying income includes gross income before expenses from all relevant sources, such as sole trader and property activities. The relevant threshold is based on your total annual income from self-employment and property combined. Landlords and self-employed individuals with qualifying income above £50,000 must comply with Making Tax Digital from 6 April 2026.

MTD obligations require you to keep digital records that show the value and date of each transaction and specify the HMRC category of allowable expenses. Under MTD, quarterly digital updates must be submitted to HMRC using MTD compliant software, and annual self assessment tax returns will be replaced by quarterly reporting and a final declaration. You must use commercially available, HMRC-approved MTD compliant software for Making Tax Digital for Income Tax.

MTD already applies to VAT registered businesses above the VAT threshold, with MTD for VAT software used to submit VAT returns via compatible software using digital links. The next major phase is tax digital for income tax – referred to as MTD for Income Tax or MTD ITSA.

What HMRC is trying to achieve

HMRC's stated aim is simple enough – fewer mistakes, better visibility and a smaller tax gap. HM Revenue and Customs (HMRC) is aiming to improve the accuracy and timeliness of tax information through MTD obligations, requiring taxpayers to keep digital records and submit quarterly updates for self-employment and property income.

The aim of Making Tax Digital is to spread the workload across the year and reduce the pressure of the end-of-year tax deadline.

Better visibility means that more timely tax information helps HMRC issue accurate tax bills and monitor compliance, including late payment penalties for non-compliance. The reality is more nuanced.

The number of individuals affected by Making Tax Digital is expected to rise to almost 3 million by spring 2028 as lower-income individuals are brought into the system, so accountants need to track key MTD for Income Tax dates and deadlines carefully.

1. Reducing errors through digital record keeping

HMRC estimates that billions are lost each year through avoidable errors rather than deliberate evasion. Paper records, manual rekeying and spreadsheet workarounds all increase risk.

By requiring businesses to keep electronic records and use digital record keeping software, HMRC believes fewer mistakes will be made when figures flow directly from source data to tax returns. Using a dedicated bank account for business income and expenses can further simplify record-keeping and help meet Making Tax Digital requirements.

This is why digital links matter, and why bridging software is only seen as a transitional solution rather than the end goal.

2. Getting more timely data

Under Income Tax Self Assessment, HMRC often waits until well after the accounting period ends to see what's happening. Quarterly submissions change that.

By requiring businesses to submit quarterly digital updates of business income and expenses, HMRC gains earlier insight into income sources, property income, self employment profits and income streams that are reported separately, such as the Construction Industry Scheme. These quarterly digital updates must be submitted just over one month after each quarter ends, with the first quarter ending on 5 July 2026 due by 7 August 2026. To meet these deadlines, you must use MTD-compliant software for timely submissions. Logging receipts and invoices regularly will simplify the process of sending quarterly updates to HMRC and help ensure compliance.

This doesn't mean quarterly updates are tax bills – accounting adjustments, tax reliefs and final tax calculations still happen at year end. But HMRC gets a clearer picture of the economy in real time.

3. Modernising tax administration

MTD is also about long-term tax administration. HMRC wants a new system that is scalable, digital by default and easier to integrate with software providers, supported by MTD-compatible accounting software that streamlines digital compliance. Reliable internet access is important for using cloud-based MTD software, and you should ensure your chosen software is compatible with your device.

The end vision is a digital system where taxpayers can view income, expenses, tax records, penalties and liabilities in one place, and where tax agents can manage client tax affairs more efficiently. You can manually create digital records for transactions from unlinked accounts or cash payments.

"Making Tax Digital is not going away."

Who Making Tax Digital affects next

The upcoming changes that matter most to accountants are tied to MTD for Income Tax, but they sit within the wider context of Making Tax Digital and HMRC's digitalisation programme.

From the start date, individuals and businesses with gross income over the qualifying income threshold from self employment and/or property income will need to comply. This includes:

• Sole traders
• Landlords with property income
• Small businesses previously outside digital reporting
• Some individuals with multiple income sources

The MTD threshold (also referred to as the relevant threshold) is £50,000 in qualifying income. Qualifying income includes gross income from self-employment, property business, and rental income from UK property. This means self employed individuals, sole traders and landlords, and those with employment income above the threshold are legally required to comply, and many will benefit from MTD for business tools that simplify record keeping and collaboration with accountants. Only income from salary, dividends, or specific allowances may be exempt, and limited companies are not currently required to comply. Some groups are automatically exempt, such as those without a national insurance number, certain disabled individuals, and those with care relief.

HMRC will check the gross income as declared on your Self-Assessment tax return to determine if and when you must join Making Tax Digital. If your gross rental income is above £50,000, you must comply from 6 April 2026 unless you qualify for an exemption. You can apply to HMRC for an exemption if it is not reasonably practical for you to use digital tools.

Corporation tax is not yet within scope, but HMRC has made clear that MTD will eventually extend further across the tax system, building on the latest developments and pilot phases of Making Tax Digital.

What actually changes under MTD for Income Tax

For affected taxpayers, the biggest shift is behavioural rather than technical.

• Record keeping becomes continuous, not annual
• Digital tools replace paper records and spreadsheets
• Quarterly updates replace one annual submission
• Final declarations replace traditional self assessment

You must use MTD-compliant software to submit quarterly updates and the final declaration to HMRC. Bridging software can be used to link a simple spreadsheet that details all your transactions directly to HMRC. Many software providers offer free trials, so you can test a few options before committing. Premium MTD-compliant software typically costs about £5 to £8 per month. Even with quarterly updates, you will still need to submit a final tax return by 31 January after the end of the tax year.

Instead of one income tax self assessment return, businesses submit:

• Quarterly submissions (income and expenses send to HMRC). HMRC uses the information from these quarterly updates and the final declaration to calculate your tax bill.
• A period statement confirming totals
• A final declaration confirming all income, reliefs and adjustments

Late submission penalties and penalty points apply for missed deadlines, reinforcing HMRC's push for regular compliance.

Why this matters to accountants

MTD isn't just a compliance exercise – it reshapes how accountants add value and creates new opportunities described in more detail in what Making Tax Digital may mean for accountants.

Better conversations, earlier

With digital records updated quarterly, accountants can spot issues earlier – cashflow pressures, rising tax bills or missing expenses. That enables proactive advice rather than retrospective fixes.

Software becomes strategic

Choosing software is no longer just about accounts production. Record keeping software, MTD software and accounting software now sit at the centre of the client relationship, so many practices are weighing up why Capium's MTD software is a smart choice for accountants.

Clients need guidance on software choices, whether that's full accounting software, own MTD compatible software or transitional bridging software during the testing phase.

This is where platforms like Capium's Making Tax Digital software fit naturally into the conversation.

Less admin, more advisory (eventually)

While the transition creates short-term workload, HMRC's goal is fewer year-end corrections, fewer errors and smoother workflows over time.

For firms willing to lean into digital tools and quarterly reporting, there's a genuine opportunity to move away from pure compliance.

Where we are now

MTD for VAT is live. MTD for Income Tax has been through a pilot scheme, extended testing phase and multiple deadline changes. HMRC is still onboarding software providers and refining guidance.

That uncertainty has caused understandable fatigue – but the direction of travel is clear.

Making Tax Digital is not going away. The UK tax system is becoming digital by default, and accountants sit at the centre of that change.

The bottom line

Making Tax Digital explained simply: HMRC wants better data, fewer mistakes and a modern digital tax system. To get there, it's reshaping how income, expenses and tax records are kept and reported.

For accountants, the challenge is helping clients navigate new rules, new software and new habits – without drowning them in jargon.

The opportunity is becoming the trusted guide through that change, backed by software that actually supports the way you and your clients work.

If you want to explore how the right digital system can support MTD compliance without adding friction, Capium's MTD software is designed for just that – and we're ready to help, with additional options covered in our overview of Capium's MTD software for VAT, ITSA and corporation tax.